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Everything about NRE / NRO / FCNR

Updated: May 5

We hear the term NRI almost every other day; Non-Resident Indians are a significant part of our Indian economy and contribute immensely. NRI's financial and investment needs might differ significantly from those in India. This is because they mostly have dual income sources- one from the country of their country of residence and the second from India (maybe or not). To facilitate their needs and financial transactions, the Reserve Bank of India (RBI) allows NRIs to open NRE (Non-Resident External), NRO (Non-Resident Ordinary), and FCNR (Foreign Currency Non-Resident) accounts in India. The Foreign Exchange Management Act 1999 (FEMA) governs and regulates these accounts, which is crucial to international trade and commerce.

To begin with, the fundamental difference between these three types of accounts is that NRE accounts are meant for NRIs to maintain their foreign earnings in Indian currency. In contrast, NRO accounts manage their income earned in India. While in FCNR, NRIs deposit foreign currency in a term deposit account maintained in an Indian bank. These accounts come with their own set of regulations and restrictions per FEMA guidelines, and NRIS must understand these rules before opening and operating these accounts. Before moving forward, let us know who an NRI and PIO are, according to FEMA, 1999.

'Non-Resident Indian (NRI)' means a person resident outside India who is a citizen of India. 

Whereas, Overseas Citizen of India (OCI)’ means a person resident outside India who is registered as an Overseas Citizen of India Cardholder under Section 7(A) of the Citizenship Act, 1955

Moving forward, let us discuss in detail the different types of accounts that an NRI can open in India according to FEMA and RBI guidelines;

  1. Non-Resident Ordinary (NRO) Account, 

  2. Non-Resident External (NRE) Account, and 

  3. Foreign Currency Non-Resident (FCNR) Account

Before we start explaining these accounts, a question arises: why can't NRIs continue with a regular resident savings account? 

It is because if they continue operating a regular savings/current account while living outside the country, they would be in violation of the FEMA Laws of the RBI. And will be liable to pay a penalty of 

  • Thrice the sum involved in such contravention where such amount is quantifiable, or 

  • Up to ₹2,00,000 where the amount is not quantifiable, and 

  • Where such contravention is a continuing one, a further penalty may extend to ₹5,000 for every day after the first day from which the violation continues.

Mr. Thakorbhai Dahyabhai Patel, an OCI, opened and maintained an ordinary savings bank account with ICICI Bank and Prime Co-operative Bank Limited. NRI/OCI are not eligible to open and maintain an ordinary savings bank account. He also transferred a sum of Rs. 85,01,100.00 from his NRE account to an ordinary savings bank account and earned interest of Rs. 35,94,988.00 lacs during 2013 and 2014. Transfer of Funds from NRE to an ordinary savings bank account was a contravention of Foreign Exchange Management (Deposit) Regulations, 2000, as amended from time to time. 4(C) of Schedule 1 of the regulation states that permissible debit to an NRE account is transferred to NRE / FCNR (B) accounts of the account holder or any other person eligible to maintain such account. The contravention was regularized through compounding on payment of Rs. 1,13,758.00 (CA 85/2019).

Let us now dive into each account's meaning, guidelines, rules & regulations. Also, the pros and cons of each type so we can make an informed decision.

The first type of account is a Non-Resident (External) Rupee Account or NRE Account, which has been explained in Schedule 1 (Regulation 5(1)(i)) of Notification No. FEMA 5(R)/2016-RB.

NRE account is an Indian rupee-denominated account that NRIs or OCIs (Earlier PIOs) can open to deposit their foreign income. The deposits made in this account are converted into Indian Currency according to the current exchange rate in the market. Simply put, it serves as a storage for your foreign income savings. They can be opened in any form; savings, current, fixed, or recurring deposit; with any authorized dealers and banks, just like other ordinary accounts in the Indian Banking System. However, as mentioned earlier, it has to be maintained at ₹ only. 

NRE accounts can be opened only by the holder ‘himself’ and not by the holder of a power of attorney in India but can be operated through them. An NRI can have a joint NRE account with other NRIs or resident relatives. However, the resident relative shall be eligible to operate the account as a Power of Attorney holder.

Power of Attorney refers to a legal authorization that gives a designated person the power to act for someone else. In an NRE account, the operations by a power of attorney are limited to making local payments or remittances and facilitating investments if the holder is eligible to do so. However, he isn’t allowed to repatriate funds outside India under any circumstances other than to the account holder himself, nor can he make a payment by way of a gift to a resident or transfer funds from one account to another NRE account.

In a typical scenario, if you deposit money in any savings, fixed, or recurring account, you receive interest; the interest received is chargeable under Income Tax Act 1961. But the interest received in an NRE account is exempt from tax. 

Like any ordinary resident account, an NRE account also allows you to borrow and take loans against the security of funds held in NRE accounts. Loans can be provided to account holders, third parties, and outside India. NRE account holders can avail overdraft facility and take loans for personal and business purposes only. In the case of third parties, loans, and overdrafts to resident individuals/ firms/ companies in India may be granted. Also, authorized dealers may allow their branches/ correspondents outside India to grant loans to or in favour of non-resident depositors or third parties at the depositor's request for bona fide purposes. No loan taken can be used for re-lending or agricultural/ plantation or investment activities.

A question arises, what if the NRI permanently returns to India; in that case, what happens to the money in the NRE account?

In that case, the NRE account must be immediately re-designated as a resident account, or the funds be transferred to a resident account. However, if the NRI is only on a short visit to India, their NRE account can continue to be treated as such during their stay. 

The money in an NRE account, including both the principal and interest, is freely repatriable to the holder’s resident country without any limits. But, we will discuss it further in the article in detail.

Knowing the permissible credits and debits is essential if you are a holder of an NRE. Credits permitted to this account are inward remittance from outside India, interest accruing on the account, interest on investment, transfer from other NRE/ FCNR(B) accounts, maturity proceeds of investments (if such investments were made from this account or through inward remittance). Also, current income like rent, dividend, pension, interest, etc., will be construed as a permissible credit to the NRE account subject to payment of applicable taxes in India. Talking about permissible debits; they include local disbursements, remittance outside India, transfer to other NRE/ FCNR(B) accounts, and investments in India.

After NRE, let us discuss the Non-Resident Ordinary Rupee Account or NRO Account, which has been explained in Schedule 3 (See Regulation 5(1) (iii)) of Notification No. FEMA 5(R)/2016-RB.

NRO is a type of bank account that an NRI can open. The primary purpose of an NRO account is to deposit and manage income earned by NRIs in India, such as rent, dividends, pensions, etc. Still, one can also deposit earnings from outside India in an NRO account. This account allows you to receive funds in either Indian or foreign currency. 

However, NRO accounts can also be opened by a foreign national of non-Indian origin visiting India. The funds can be remitted from outside India or by the sale of foreign exchange brought by him to India, and no local funds other than interest can be credited to the account. The balance in the NRO account may be paid to the account holder at the time of his departure from India, provided the account has been maintained for a period not exceeding six months.

Like an NRE account, NRO accounts can be opened with any bank in India authorized to deal in foreign exchange in any form; such as savings, current, fixed, or recurring deposit accounts. These accounts can be opened jointly with residents on a former or survivor basis. Also, NRIs and/or OCIs (Earlier PIOs) may hold an NRO account jointly with other NRIs and/or OCIs (Earlier PIOs). Unlike an NRE account, the interest credited in an NRO account is fully taxable under the Income Tax Act of 1961. But the loan-granting regulations are similar to an NRE account; except that loans cannot be granted outside India. 

If an NRI holding an NRO account, permanently returns to India, his account will be treated in the same way as an NRE account was in a similar condition; which has been discussed earlier.

Nonetheless, the account holder must comply with RBI regulations while crediting and debiting his bank account. This means the NRO account is not freely repatriable, implying that the holder can only move funds outside India with prior clearance and necessary permissions. But, interest earned on the principal amount deposited can be repatriated freely. The principal amount can be transferred up to USD 1 million in one financial year post payment of applicable taxes.

Inward remittances from outside India, legitimate dues in India, rupee gift/ loan made by a resident to an NRI/ OCI relative, and transfers from other NRO accounts are permissible credits to the NRO account as per RBI guidelines. NRE accounts can be debited for the purpose of local payments, transfers to other NRO accounts, or remittance of current income abroad.

As mentioned earlier, let us understand why NRE accounts are freely repatriable, whereas NRO accounts are not.

The main distinction between the two is that NRE accounts allow for free repatriation, which means that money in an NRE account can be transferred without restrictions to any other country, including the NRI's country of residence. However, NRO accounts are not freely repatriable, so money can only be transferred back to the NRI's home country or any other country after required approval.

The disparity in treatment between NRE accounts and NRO accounts can be attributed to their respective purposes and the origin of the income they contain. NRE accounts are designated for depositing income earned outside India, such as salaries, dividends, or rent, and are maintained in Indian currency. Since the income in these accounts is earned abroad, it is considered to be of foreign origin, and there are no tax implications in India. Consequently, funds in NRE accounts can be repatriated without any restrictions.

In contrast, NRO accounts are also maintained in Indian rupees but are used to deposit income earned within India, such as rent, dividends, or pensions. However, since the income is of Indian origin, there are tax implications in India, and as a result, the repatriation of funds from NRO accounts is subject to certain restrictions. These restrictions exist because the income earned in India is subject to Indian tax laws, and repatriation of such funds must comply with those regulations.

This difference is due to NRE accounts, which are maintained in Indian currency and intended to deposit income earned outside India, such as salary, dividends, or rent. Because the income was earned outside of India, it is understood that it is of foreign origin, and no tax implication arises in India and is therefore freely repatriable.

On the other hand, NRO accounts are also kept in Indian rupees and are intended to deposit income earned in India, such as rent, dividends, or pensions. But, the funds are subject to certain repatriation restrictions because they are of Indian origin. After all, the income was earned in India. Thus, tax implications arise in India, therefore, repatriable rules.

The purpose of these restrictions is to prevent taxable income from being repatriated without paying the requisite taxes to the government, thereby ensuring that the government does not lose out on tax revenue.

Last but not least, let’s understand the implications of the Foreign Currency Non-Resident Account or FCNR Account, which has been explained in Schedule 2 (See Regulation 5(1) (ii)) of Notification No. FEMA 5(R)/2016-RB.

FCNR is a foreign currency-denominated, term deposit account that can be opened by NRIs or PIOs. These accounts are designed to give NRIs a safe and straightforward option to deposit and manage their foreign currency earnings. 

FCNR accounts can be opened by remitting funds from outside India or by transfer of funds from existing NRE/FCNR accounts. Remittances from outside India should be made in the currency in which such an account is to be opened. However, where the funds are remitted in a currency other than the currency in which the account is to be opened, the same shall be converted into the desired currency at the prevailing exchange rates.

FCNR accounts provide better interest rates than conventional savings accounts, and the deposits are entirely repatriable. Interest on balances held in these accounts may be paid half-yearly or on an annual basis as desired by the depositor and the Account holders can withdraw these funds without any limits. 

In case an account holder becomes a resident of India, they can choose to keep their deposits until they mature at the agreed interest rate. However, the deposits will be considered resident deposits for all purposes except for interest rates and reserve requirements that are applicable to FCNR (B) deposits. Upon the return of the account holder to India, the FCNR (B) deposits should be converted by authorized dealers into either resident rupee deposit accounts or RFC accounts (if eligible), and the interest on the new deposit shall be paid according to the relevant rates for such deposits.

Banks can also provide loans against the deposits held in these accounts to the depositor or to a third party. The provisions in this respect are the same as those applicable to NRE account.

FCNR accounts can be opened for fixed terms ranging from 1 year to 5 years, and the interest rates are fixed at the time of account opening. The interest earned on FCNR accounts is not subject to Indian taxation. Overall, FCNR accounts offer NRIs a convenient way to make higher returns on their foreign currency earnings while keeping their money safe and secure in India.

If you are an NRI, should you choose an NRE or NRO account?

If you are an NRI, your choice between NRE and NRO account depends on the type of income you will receive, if it will be foreign or Indian income.

If your only source of income is earned outside India and you want to repatriate the funds freely, then you should choose an NRE account. The funds in an NRE account are freely repatriable, meaning you can transfer the funds back to your country of residence or any other country without any restrictions.

On the other hand, if you have income earned in India and outside India and do not require immediate repatriation of funds, then you should choose an NRO account. The funds in an NRO account are not freely repatriable. You must obtain the necessary approvals for transferring the funds to your country of residence or any other country. NRO accounts are suitable for depositing income earned in India, such as rent, dividends, or pensions.

It is important to note that NRE accounts are maintained in Indian Rupees and can be converted to foreign currency at the time of repatriation. Thus, NRE accounts are subject to currency fluctuations. NRE and NRO accounts also offer different tax implications.

To gain a better understanding of the implications, consider the following situations featuring Mrs. Ritu Kumar, an NRI who provides design services worldwide, including in India, and has multiple sources of income.

Situation 1: Mrs. Kumar owns a property in India and receives regular rental income from that source. In this case, it is advisable for her to open an NRO account as it is specifically designed to manage both her Indian and foreign income.

Situation 2: Mrs. Kumar does not have any Indian clients or rental income from India, but her parents still reside in India, and she needs to send money to them to manage her funds. In this scenario, it would be more beneficial for her to open an NRE account instead of an NRO account since she is not earning any income from India.

We hope now it will be easier to decide whether you should go for NRE or NRO account.

Efforts By -

Adya Agrawal

Rushil Gupta

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